UK

1. UK Government launches taskforce to assess the security impacts of climate change
2. FCA publishes climate adaptation & resilience resource for regulated firms
3. UK launches drought support package to strengthen agricultural resilience

EU

1. ECB applies climate haircuts to corporate bond collateral; corporate loans to follow
2. EU adopts revised ESRS for in-scope entities; European Supervisory Authorities (ESAs) publish position on EU Taxonomy simplification
3. European Banking Authority (EBA) simplifies ESG risk requirements for banks
4. EU Commission launches ETS Review alongside Electrification Action Plan
5. EU ‘Empowering Consumers for Green Transition’ (EmpCo) Directive approaches enforcement date
6. EFRAG publishes EU sustainability reporting state-of-play report
7. EBA reports stable climate risk exposures across EU banking sector

Global

1. UNEP FI publishes framework for sustainability risk integration in banks
2. United States pushes back on EU sustainability rules

EU | ECB applies climate haircuts to corporate bond collateral; corporate loans to follow

The European Central Bank (ECB) has integrated climate transition risks into its collateral framework [1], introducing climate-related valuation considerations for eligible corporate bonds and confirming plans to extend the approach to corporate loans. The move further embeds climate considerations into monetary policy operations and may affect both corporate funding and bank collateral management. Key developments include:

• Climate-linked haircuts applying to corporate bonds: Since June 2026, the ECB has applied additional climate-related valuation considerations to eligible corporate bonds used as collateral in Eurosystem credit operations, based on the issuer's climate transition risk profile.
• There is a three-factor assessment incorporating:
  • Stressor: Exposure of the issuer's sector to transition-related risks.
  • Exposure: Company-specific factors such as greenhouse gas emissions, climate disclosures and decarbonisation targets.
  • Vulnerability: Remaining maturity of the debt instrument, with longer-dated securities subject to greater uncertainty.
• Extension to corporate loans: The ECB announced in July 2026 that the framework will be extended to eligible corporate loans pledged as collateral. The measures will apply to exposures to non-financial corporates and are expected to be implemented no earlier than the end of 2027.
• Additional adjustment of up to 5%: The climate-related modification can reach up to 5% and is applied on top of existing ECB collateral adjustments.
• Collateral eligibility unchanged: Existing requirements continue to apply, including minimum credit quality thresholds and eligibility criteria for both bonds and loans.

Implications for issuers: The ECB’s introduction of climate-related considerations reinforces the ongoing relevance of climate performance as a factor influencing access to capital and funding conditions. Therefore, issuers should expect greater scrutiny on their exposure to transition risks, emissions profile and preparedness for a low-carbon economy. To be viewed favourably, issuers will need to provide robust climate disclosures, credible transition plans and decarbonisation targets. To this end, issuers should be aware that ISS STOXX was recently reselected as a climate and nature data provider for the European System of Central Banks (ESCB), specifically providing physical risk metrics, Green and social bond metrics and transition indicators, amongst other data points [2]. Similarly, MSCI was successful in an EU-wide procurement process in April that will see it provide climate, nature, and geospatial data to the ESCB for use in monetary policy analysis, climate risk assessment, and reporting [3].

Additionally, demonstrating measurable progress on emissions reduction, climate-aligned capital expenditure and strong governance oversight will become increasingly important. It is important to note that despite this, the ECB’s market stability mandate means that the exclusion of oil and gas bonds from repo transactions is not expected to occur immediately. Issuers that can evidence resilience under climate transition scenarios and clearly communicate how their business model is adapting are likely to benefit from more favourable assessments. Conversely, weak disclosures could reduce the attractiveness of an issuer's bonds as collateral and the world’s first contribute to higher financing costs over time.

Implications for banks: The implications are potentially more significant for banks than for bond issuers. Corporate loans account for ~27% of ECB collateral, compared with around 2% for corporate bonds. Once implemented, climate-related factors affecting corporate loans could reduce the collateral value of pledged loan portfolios, affecting banks' funding efficiency and potentially increasing funding costs for institutions with higher exposure to transition-sensitive sectors.

Implications for investors (bank treasuries): Bank treasuries that hold corporate bonds for liquidity management or collateral purposes may need to consider the impact of climate-related collateral adjustments. Bonds issued by companies assessed as having higher transition risk could receive larger haircuts, reducing the amount of liquidity that can be raised against them in ECB repo operations. Over time, this could make certain bonds relatively less attractive from a collateral management perspective compared with securities receiving more favourable treatment.

UK Government launches a taskforce for security impacts of climate change

On 26 June, the UK Government launched a taskforce to enhance the UK’s preparedness for the security impacts of climate change [4]. Practically, the taskforce will look how climate impacts could translate into domestic pressures and understanding the impact of heightened asset/infrastructure-related investment risks. 

FCA publishes climate adaptation and resilience resource for regulated firms

On 4 August, the UK Financial Conduct Authority (FCA) launched a new Climate Adaptation and Resilience Resource [5], highlighting how physical climate risks could affect the availability and pricing of financial products, including mortgages, insurance, lending and investments.

The information release underscores the importance of incorporating physical climate risks into risk management, underwriting and capital allocation decisions, as firms adapt products and services to changing climate conditions. The FCA also signalled upcoming opportunities for firms to test new climate scenario analysis tools, expected in October, developed through engagement with the UK Climate Financial Risk Forum (CFRF).

UK launches drought support package to strengthen agricultural resilience

The UK Government announced a package of measures in August to support farmers [6] as prolonged dry weather, water shortages and elevated wildfire risks continue to affect agricultural production across England. The package combines immediate relief with longer-term resilience measures, including:

• Temporary flexibilities within Environmental Land Management (ELM) schemes, enabling farmers to cut and graze land, create firebreaks and delay planting requirements without affecting payments.
• A £50 million increase in the Sustainable Farming Incentive (SFI26), taking the total programme budget to £290 million.
• Up to £15 million for on-farm reservoir projects via the reopened Water Management Grants
• Planning reforms and guidance to accelerate agricultural water storage projects.
• Greater flexibility in water abstraction licences to improve drought resilience.

The announcement comes as NatWest’s Specialist Agriculture Team continues to engage closely with customers, offering tailored financial and advisory support to help farming businesses navigate near-term challenges while strengthening long-term resilience. Further information is available here.

EU adopts revised European Sustainability Reporting Standards (ESRS) for in-scope entities; European Supervisory Authorities (ESAs) publish position on EU Taxonomy simplification

• Adoption of revised ESRS (and voluntary ESRS): On 3 July, the European Commission adopted the revised ESRS and a voluntary reporting standard [7] for companies outside CSRD scope, marking a key milestone in the Omnibus I simplification package. Both Delegated Acts are now under review by the European Parliament and Council, with adoption expected in Q4 2026.
• ESAs’ position on Taxonomy simplification: The European Supervisory Authorities (ESAs – EBA [8], European Securities and Markets Authority (ESMA) [9], and European Insurance and Occupational Pensions Authority (EIOPA) [10]) published consultations on the simplification of the Taxonomy Disclosures Delegated Act. The ESAs are expected to deliver their final advice to the Commission in October. 

European Banking Authority (EBA) simplifies measures for ESG risk requirements for banks 

• Final Pillar 3 ESG ITS: The EBA published its final Pillar 3 ESG Implementing Technical Standards (ITS) [11] completing the second phase of the ESG reporting framework under Capital Requirements Regulation III (CRR3). The requirements will apply from 31 December 2026 for most banks and 31 December 2027 for small and non-complex institutions (SNCIs), expanding ESG disclosure obligations to large non-listed institutions.

        For larger banks, the framework introduces a "core plus supplement" approach and removes certain Green Asset Ratio (GAR) and Banking Book Taxonomy Alignment Ratio (BTAR) disclosure templates following the suspension of these metrics until the end of 2026.

• Guidelines for retail banking products: The EBA published its revised Guidelines on Product Oversight and Governance for retail banking products [12], applicable from January 2027. The revisions strengthen expectations for products marketed with ESG features and aim to mitigate potential greenwashing risks.

EU Commission launches ETS Review alongside Electrification Action Plan

The EU Commission has launched a review of the EU Emissions Trading System (ETS) – world’s first and largest carbon market – alongside an Electrification Action Plan, signalling a stronger focus on industrial decarbonisation, energy security and its 2040 electrification target of 46% [13]. Key measures include:

• Continued support of the EU ETS Innovation Fund [14] to support commercial application of innovative clean technologies in a wide range of sectors. 
• A proposal to require Member States to allocate 50% of ETS revenues to decarbonisation, though this has not been formally legislated yet and thus there are currently no rules on using ETS revenues
• The establishment of Industrial Decarbonisation Bank as the funding vehicle to grow industrial decarbonisation across Europe at scale, with €100bn of planned deployment before 2030.
• In addition, proposed reforms to the Market Stability Reserve (MSR) [15] aimed at improving carbon market stability, predictability and investment certainty.
• The Modernisation Fund [16] to support lower-income Member States in upgrading their energy systems and industrial infrastructure. In tandem, the Electrification Action Plan seeks to accelerate electrification by narrowing the cost gap with fossil fuels and scaling adoption of technologies such as heat pumps, electric vehicles and batteries. 
• Financing support to be provided through the Social Climate Fund, Industrial Decarbonisation Bank and social leasing schemes to unlock investment and deployment across the economy.

EU ‘Empowering Consumers for the Green Transition’ (EmpCo) Directive approaches enforcement date

The EU's Empowering Consumers for the Green Transition (EmpCo) Directive [17] introduces tougher anti-greenwashing rules for consumer-facing sustainability claims. The legislation restricts generic environmental claims, unsupported net-zero statements, unverified labels and misleading durability or repairability claims. The rules apply to marketing materials targeting EU consumers, with Member States required to transpose the Directive by 27 September 2026.

EFRAG publishes EU sustainability reporting state-of-play report 

The European Financial Reporting Advisory Group (EFRAG) has published its 2026 Sustainability Reporting State of Play Report [18], analysing 905 FY2025 sustainability statements prepared under the CSRD/ESRS framework and subject to external assurance.  The report indicates that sustainability reporting practices are becoming more established, with Climate Change (E1), Own Workforce (S1) and Business Conduct (G1) remaining the most frequently identified material topics across sectors. Key findings include:

• Double Materiality Assessments (DMAs) continued to evolve, with most companies updating their FY2024 assessments and many adopting hybrid top-down and bottom-up approaches.
• Sustainability is becoming more embedded in corporate strategy, with 63% of companies linking sustainability performance to executive remuneration.
• Climate transition planning continues to gain traction, with reporting on transition plans increasing by 25% year-on-year.
• Climate target setting continues with more than half of reporting companies disclosing near- and long-term decarbonisation targets aligned with a 1.5°C pathway.

NatWest’s article in the latest edition of the International ESG & Sustainable Finance Review discusses the opportunities and challenges the real economy will face during the transition, you can read more about it here. 

EBA reports stable climate risk exposures across EU banking sector

The European Banking Authority (EBA) has reported broadly stable transition and physical climate risk exposures across EU/EEA banks in H2 2025, according to its latest ESG Risk Dashboard [19]. The update also highlights continued improvements in climate-related data quality, particularly for mortgage portfolios, strengthening banks' and supervisors' ability to assess, monitor and manage climate risks.

UNEP FI publishes framework for sustainability risk integration in banks

United Nations Environment Programme Finance Initiative published "Conceptual Framework for Sustainability Risk Integration" [20] which sets out how sustainability risks should be considered by banks across the seven core elements of risk management:

• Risk strategy: embedding sustainability considerations into the bank's overall risk-taking approach.
• Governance: assigning clear ownership, oversight & accountability across the three lines of defence.
• Risk appetite: defining quantitative and qualitative boundaries for sustainability-related exposures.
• Risk taxonomy and scope: establishing how sustainability risks are classified and where they apply.
• Risk identification, measurement and materiality assessment: determining which sustainability risks are financially significant.
• Risk management actions: implementing controls, client engagement & other mitigation measures.
• Risk monitoring & reporting: tracking exposures & ensuring consistent internal & external reporting. 

United States pushes back on EU sustainability rules

On 23 July, the European Financial Reporting Advisory Group (EFRAG) published the proposed ESRS for non-EU entities (N-ESRS) [21] with the  first mandatory reporting expected in January 2028.

Following the Omnibus revisions, the scope for non-EU undertakings has been narrowed down significantly: 

Other key changes include:

• Impact-Only Materiality: Shifts away from the standard "double materiality" approach to an impact-only materiality approach to align better with global frameworks like the International Sustainability Standards Board.
• Reporting Options: Proposes a global approach, a mixed approach (climate globally, others limited to EU impacts), or voluntary full ESRS adoption.

Following this, the US government has warned that it may take retaliatory action [22] to protect US businesses from what it considers inadequate attempts to address the reporting burdens arising from amendments to the Corporate Sustainability Due Diligence Directive (CSDDD) and Corporate Sustainability Reporting Directive (CSRD). The expectations include:

• Limiting the scope of the CSDDD primarily to EU-based entities and activities
• Excluding non-EU revenues from potential penalty calculations
• Recognising the US as a low-risk jurisdiction given its existing regulatory and governance framework
• Preventing the reintroduction of mandatory net-zero transition planning requirements

Authors

Rui Zu, Director, Sustainable Finance Advisory (Rui.Zu@natwest.com)

Daniel Bressler, Director, Sustainable Finance Advisory (Daniel.Bressler@natwestmarkets.com)

Usman Zaheer, Associate, Sustainable Finance Advisory (Usman.Zaheer@natwest.com)

Anika Wadhwa, Analyst, Sustainable Finance Advisory (Anika.Wadhwa@natwest.com)

References

[1]  ECB begins applying climate risk factors in collateral frameworks 

[2]  ISS STOXX Sustainability Reselected as Climate and Nature Data Provider for European Central Banks | ISS STOXX

[3]  Deutsche Bundesbank selects MSCI for climate data | MSCI Inc. posted on the topic | LinkedIn

[4]  UK Government announces the establishment of Taskforce to strengthen climate security

[5]  UK FCA publishes climate adaptation and resilience resource

[6]  UK Government announces drought support package for farmers

[7]   EU Commission adopts revised ESRS and voluntary ESRS

[8]  EBA’s position on EU Taxonomy simplification

[9]   ESMA’s position on EU Taxonomy simplification

[10]  EIOPA’s position on EU Taxonomy simplification

[11]   EBA simplifies measures for ESG risk requirements for banks

[12]  The EBA clarifies its Product Oversight and Governance Guidelines which address greenwashing risks in ESG products | European Banking Authority

[13]  EU Commission launches EU ETS Review alongside Electrification Action Plan

[14]  EU ETS innovation fund for commercial application of clean technologies

[15]  Market Stability Reserve to improve carbon market stability

[16]  EU Modernisation Fund to support lower-income Member States for energy system upgrades

[17]  EU EmpCo Directive approaches enforcement

[18]  EFRAG published its 2026 sustainability reporting state of play report

[19]  EBA ESG risk dashboard shows stable climate risk exposures and continued improvements in data quality | European Banking Authority

[20]  UNEP FI publishes framework for sustainability risk integration in banks

[21]  ESRS for Certain Non-EU Undertakings in Accordance with Article 40a of the Accounting Directive, Exposure draft consultation | EFRAG

[22] United States pushes back on EU sustainability reporting rules